[Good Returns TV] The chairman of the Retirement Income Group at Challenger in Australia, Jeremy Cooper, talks to Philip Macalister about how the annuities market will grow in New Zealand.

It is only a matter of time before there is increased demand for annuities in New Zealand, the chairman of the Retirement Income Group at Challenger in Australia says.

Jeremy Cooper has been in New Zealand talking about retirement income and annuities. In Australia, the Challenger business wrote A$1 billion ($1.07b) of lifetime annuities and A$3b in term annuities last financial year. That grew from zero in 2010.

New Zealand’s annuities market is still undeveloped by comparison to Australia’s but Cooper said the same pressures that had boosted it in Australia would apply here.

“As that pool of savings grows and the average age of the members of it is older, I think policy-makers here will be looking to Australia and see that we’ve been in this compulsory saving game a little bit longer and I think it’s only a matter of time before they look to what we’re doing and start thinking about longevity risk management, annuities, or other pool products, as a sort of bolt-on to KiwiSaver.”

Cooper is part of the Australian Government group developing a MyRetirement framework that has proposed requiring super providers to offer an annuity product.

It would not be given to members as a default option but Cooper said it was intended that the fact a trusted provider was offering it would signal it was something people should think seriously about.

“I think forcing people to do things is always difficult. We did, in Australia, force people to contribute to our system, so that’s a pretty strong sort of remedy. You want to be careful how many times you do that. So, I think we are trying to encourage, educate, but not actually force.”

Cooper said education of advisers would be important if annuities were to be adopted in New Zealand.

“A lifetime annuity is quite a special product and you need to make advisers aware of the features of them.

“And we found that by – we call it hand-to-hand to combat – we’ve gone and had the discussions, we’ve put the materials together, we’ve done the thought leadership, and we’re now seeing that advisers instead of comparing annuities with shares and saying, ‘Hang on, why would I buy an annuity because the return’s lower than the share,’ they realise that annuity sits in the defensive part of the portfolio, and it’s family-related assets and government bonds and fixed income and bank deposits.

“Once they understand that, they can see the advantages of having these products, rather than just saying, ‘Well, they don’t return as much as shares, why should I invest in them?’”

Cooper said it would make sense to see Challenger in New Zealand but there were no immediate plans.

“We’re a company that will take opportunities where they make sense. You’ve got a younger savings system than we’ve got, so it’s really a matter of at some point I think there will be the logic and the demand for that sort of product in this country.”

Comments from our readers

On 21 March 2018 at 1:44 pm Brent Sheather said:

Has anyone calculated the internal rate of return implicit in an annuity written by Challenger? Last time I did the internal rate of return was less than the yield on a 20- year Australian government bond. Oh dear!

On 22 March 2018 at 11:27 pm Cooperannuation said:

Brent, we of course look at the IRR of our annuities on a regular basis. The key swing factor, once you know the payment rate, are your life expectancy assumptions. In other words, how many monthly payments should you expect to get over your unknown lifespan? The Aussie life expectancy numbers for 65-year olds today are 87 for males and 90 for females. In fact, what is likely to happen is that one standard deviation of outcomes (let’s take females) is that 2/3s of them will die between 82 and 98. So, when you were assessing the IRR, what life expectancy were you using? That’s the thing with annuities, they are mostly an insurance product. If you don’t value the insurance, then they seem less valuable.

On 23 March 2018 at 12:41 pm Brent Sheather said:

Thanks for replying. I used the life expectancy numbers from some government department, probably the Statistics Department from memory. I agree that it’s the insurance part of an annuity that makes it cost so much but if the IRR approximates that of an Australian government bond then obviously, given the annuity is more risky than an Australian government bond, it is overpriced. I imagine most annuity providers invest a large proportion of the premium in Australian government bonds with the balance in higher risk instruments. The conclusion therefore is that they are pocketing the risk premium for themselves.

Could you advise Good Returns' readers of the IRR's implicit in an annuity purchased by a 65 year old male and female? My view is that data should be presented to all purchasers of annuities.

On 23 March 2018 at 2:30 pm Cooperannuation said:

Brent
We have a paper on this. I will arrange to have the numbers updated and post the relevant parts for you and other readers.